How to Calculate Employee Benefits: The Ultimate Handbook

Calculating employee benefits is crucial in creating competitive compensation packages that attract and retain top talent. As employee satisfaction has taken center stage in business success, employers are more willing to offer comprehensive employee benefits.

These benefits are more than just healthcare and retirement plans. They ensure holistic care for employees by improving employees’ personal and professional lives.

While these benefits are well and good, they are an expense to businesses. Therefore, they must be optimized to help both employees and employers. You need to know what benefits are adding value to your business and what is not by calculating employee benefits accurately.

In this blog, we look at how to calculate the cost of employee compensation packages and arrive at how much you are investing in employee benefits.

Types of employee benefits

Before delving deeper into learning the process of calculating employee benefits, let’s understand the major types of employee benefits.

1. Statutory benefits

Statutory or mandatory benefits are legal requirements that businesses need to comply with. Employers need to pay contributions to the central or state government employee welfare schemes, insurance, retirement funds, etc. The employers are legally required to do so, no matter what. While most countries have such requirements, they are not the same.

The contributions to the EPF in India accrue an annual interest of 8.15 percent for the employees.

2. Fringe benefits

Fringe benefits are non-cash rewards given to employees. The term ‘fringe benefits’ is popularized by the Internal Revenue Service (IRS) in the US.

Although employers are not required to do this by law, they do it to keep the employees motivated and inspired. Fringe benefits are also meant to encourage employees to build long-term careers with businesses.

Employee resource groups, such as LGBTQ+ Alliance, Women@HubSpot, People of Color at HubSpot, etc.

3. No cost benefits

These benefits come at no cost to the business, hence the name. These are additional benefits that businesses offer their employees apart from statutory and fringe benefits.

While there is no cost involved in offering these benefits, they can profoundly increase the quality of work, personal life, and performance of employees.

Examples of employee benefits

Every business offers numerous benefits to employees to keep them satisfied, happy, and performing well. Let’s learn about a few of the most popular employee benefits.

1. Health insurance

A widely offered employee benefit in the world, health insurance benefits are crucial for employees as the costs of medical care are constantly on the rise.

Having readily available medical support that’s covered by employees can take off huge financial burdens of the employees. And it will make them feel taken care of by their employer, which boosts their morale.

2. Retirement plans

Retirement plans, another popular and widely offered employee benefit, ensure that employees can enjoy financial freedom in their retirement lives. As employees may not be able to work after retirement to support them financially, retirement plans offer them regular income. This ensures employees’ dignity and independence even after they have stopped working.

There are different types of retirement plans in different parts of the world. A few examples are:

• Employee Provident Fund
• 401(K)
• IRA Plans

3. Wellness programs

The physical and mental well-being of employees is vital for employers. Healthy employees ensure they can contribute to the growth of the company and grow in their careers.

Many employers offer wellness programs, such as:

• Fitness programs
• Stress management programs
• Yoga programs
• Smoking prevention programs

4. Career development programs

Every employee aspires to grow in their career, and employers support this by providing them with various career development and upskilling opportunities. This could be in the form of internal training programs, coaching, workshops, masterclasses, etc. Or in the form of tuition assistance to programs offered by leading education providers.

These benefits are helpful for employers and employees alike. It satisfies the employee’s desire to upskill and grow while providing trained talent to the businesses.

5. Family and childcare benefits

This is another crucial benefit that businesses can offer their employees. Poor work-life balance is one of the primary reasons for many employees to quit organizations. And many employees quit their jobs to look after children and parents.

By offering adequate family and childcare benefits, businesses can retain their top talent. And this is an excellent example of a win-win situation as everyone comes out as winners in the situation—the employee, the family, and the employer.

How to calculate employee benefits?

Calculating employee benefits includes understanding diverse factors that affect the cost of benefits.

The following factors affect the calculation of employee benefits:

• Type of employees
• Full-time employees
• Contract employees
• The number of employees
• The contribution of the employer to benefit schemes

For an employee

Let’s take a step-by-step approach to the calculation.

Step 1: Add the expenses of each benefit for a year.

Step 2: Now, divide the total expenses by the annual salary of an employee.

Step 3: Multiple the result with 100 to get the percentage.

Example

Let’s say you are paying the following employee benefits annually:

1. Performance incentives: USD 10,000
2. Travel allowance: USD 5,000
3. Insurance: USD 10,000
4. Learning benefits: USD 5,000

Total cost of benefits per year: USD 30,000

Suppose you are paying USD 120,000 as an annual salary to your employee.

The total cost of your employee benefit for that employee is:

USD 30,000/USD 120,000 = .25

Now, multiply it with 100.

.25x100 = 25 percent.

Your organization’s employee benefits cost per annum for a single employee is 25 percent.

For your business

Here, you need to calculate the total expenses incurred for employee benefits. And then calculate the total salary you pay annually for all the employees.

Divide the employee benefits by the total salary expenses. And multiply by 100 to get the percentage value.

Example

Let’s say you have an annual expense of 400,000 paying for the employee benefits. And your total salary expense is USD 2,000,000.

So, the total cost of your benefits is:

USD 400,000/USD 2,000,000 = .2

Now, multiply it with 100.

.2x100 = 20 percent.

Your organization’s employee benefits cost per annum is 20 percent.

What’s the importance of employee benefit costs

Employee benefits come at a cost, and as a business, you need to understand this. Instead of looking at it as an expense, consider it an investment for the growth of your business.

This approach is beneficial while calculating employee benefits and the ROI of these investments.

They can help your business in the following ways.

1. Boosts employee retention

The talent crunch is a real business problem that employers have been facing for a couple of years now. Employee benefits are a top strategy to instill a sense of loyalty in the workforce and retain them.

Happy and satisfied employees stick with their employers longer than unhappy employees.

2. It helps attract top talent

When you have an excellent employee benefits program, and employees are happy working with you, it will attract more top talent. Most employees look at the benefits offered by employers before they accept an offer.

Further, when employees are happy, they also refer their friends and relatives to the business, which is an efficient way to find talent.

3. It helps improve productivity

Employee benefits make employees feel more valued and rewarded for their contributions to the business. This leads to your talent being happy and satisfied, and it leads to better productivity and efficiency at work.

As a result, they will be more inclined to work harder and stay loyal to the business.

4. Comply with legal requirements

Businesses have a legal obligation to provide sufficient benefits to their employees. By prioritizing employee welfare and offering adequate benefits, they can ensure compliance with legal requirements and mitigate the risk of facing employee-related legal challenges.

Conclusion

The importance of employee benefits cannot be stressed enough. While they look like an expense to the business on the surface, the advantages of these employee support programs far outweigh the costs.

That’s why calculating employee benefits is crucial for businesses, as understanding its costs helps them determine the ROI and optimize it further for better efficiency.

Hence, as a business, you must treat employee benefits as an investment and strategy that brings long-term benefits rather than a business expense.